Unless you’ve been living on a tropical island with no access to internet this summer (if you have, I am jealous), the news has been impossible to miss. Inflation and rising interest rates are causing economic uncertainty. So far this year, commercial real estate has been an ever-changing landscape; cap rates and property values are adjusting at such a breakneck speed that it’s hard for sellers to keep up.
At the beginning of 2022 we were experiencing peak property pricing and it was undeniably a seller’s market. But as the year has progressed and inflation has pushed interest rates higher, the market has started to reprice assets. This is expected to continue as the Fed announces more interest rate increases throughout the remainder of the year.
It’s these periods of repricing that put buyers and sellers at different ends of the spectrum and creates a bid-ask gap. Some sellers are sticking to their guns and still expect market pricing from two months ago; buyers are more than happy about repricing and are expecting to get a deal. If neither party is willing to budge, this disconnect is what results in a slowdown of commercial property transactions.
Notice I said some sellers are sticking to their guns. In many cases, sellers are accepting of the current reality and if they want to move their property, they are willing to adjust their pricing to get the deal done – especially because many in the CRE world expect it to get worse before it gets better.
In the long-term picture I anticipate we will see lower inventory as sellers realize that unless they have to sell, it might be best to hold onto their assets for now. This shift aligns with the perspective of the buyer as well; as financing becomes more difficult to attain, the buyer pool will shrink thus potentially making deals less competitive.
However, in the short-term and for the duration of 2022, I am optimistic deals will continue to transact. Both buyers and sellers can see the writing on the wall and realize that the Fed has more planned rate increases. Buyers and sellers are eager to transact before financing terms and increased interest rates make acquisitions impossible.
Justin Langlois, CCIM is a Commercial Real Estate Investment Advisor with Stirling Properties servicing Baton Rouge, Louisiana and surrounding markets. Please reach out to Justin to discuss your real estate investment strategies.